Comment: Commission on tax must get it right first time

IN THE era of “more powers”, what – and who – will guide Scottish Government policy on the economy and tax? How will we know whether its forecasts are fair and reasonable? Who will staff the proposed new Scottish Fiscal Commission? And who gets to nominate the top officials?

Of all the institutions being prepared for the arrival here of more powers over tax and spending, the Fiscal Commission is arguably the most critical. A bill giving the SFC a basis on statute is now before the Holyrood Parliament.

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Whether you are in business, working in the public sector or a private citizen concerned over tax policies actual or proposed, it is of major importance.

The commission will be tasked to run an informed and independent eye over fiscal policy, tax revenue, borrowing and debt projections and to provide guidance on whether the government’s own forecasts are trustworthy. Setting it up requires attention to process and a numbing granularity of detail. But it is vital to get this right “from the off”.

But what should we be looking for? And are there systems in other countries from which we can learn? An outstanding report has just been submitted to the Scottish Parliament’s finance committee by Ian Lienert, an independent consultant in public financial management.

It covers the SFC’s mandate, operational independence, governance arrangements and accountability to parliament. And it provides guidance on thorny issues such as whether the commission should provide independent forecasts in addition to the Scottish Government official forecasts, whether it should exert influence over Government forecasts, whether there should be a legislative requirement to prepare a charter for budget responsibility and an obligation to assess adherence; and how key members of the commission should be appointed.

Scotland is one of the few devolved regions of Europe that has created an independent fiscal institution (IFI). Some non-Eurozone countries (eg, Poland, New Zealand) have decided not to establish an IFI because existing fiscal institutions are adequate and/or macro-fiscal forecasts are not systematically biased. Since 2013, all Eurozone countries must establish an IFI, even though the need is not pressing in countries with low fiscal deficits and debt (eg Estonia).

Lienert recommends that the bill establishing the SFC should set out a core mandate to assess the realism (or “reasonableness”) of the Scottish Government’s macroeconomic and fiscal forecasts – rather wider than that currently proposed as it includes assessing the government’s macroeconomic forecasts and expenditure estimates in annual budgets. “It would be useful to state explicitly in the SFC bill”, he adds, “that the SFC must perform its duties objectively, transparently and impartially”.

He also suggests it states publicly the reasons why the SG’s forecasts are realistic or unrealistic and that Holyrood should consider the effect of alternative forecasting assumptions or methodologies on the budget forecasts of ministers.

The bill is currently silent on whether the commission can or must prepare alternative macroeconomic and fiscal forecasts – a requirement that would add materially to its staff and costings.

Should it prepare official fiscal forecasts? As devolved tax forecasts have been prepared for only a few years it is too early to assess if there is statistical evidence that its forecasts are biased. And very few other IFIs prepare such forecasts. Care needs to be taken here that the commission does not bite off more than it can chew.

Should the mandate be widened to include assessments relating to the wider fiscal framework? In particular, the present SFC bill could require SFC assessments of Scotland’s fiscal stance and adherence to the government’s fiscal rules or medium-term fiscal targets, and Scotland’s fiscal sustainability. There are complex issues here, not least weaknesses in relations between the UK and Scottish governments.

In present circumstances, the SFC cannot assess medium-term projections against fiscal targets or fiscal rules. Lienert recommends, inter alia, the Scottish Government adopts two fiscal rules: a “balanced budget” rule consistent with the agreed level of borrowing, a limit on net debt, and assess compliance with the SG’s fiscal rules.

Lienert strongly recommends the dropping of the requirement on the commission to submit a copy of its report to the government prior to submission to the Scottish Parliament. This would reduce further the risk of interference in the commission’s work and prejudice its independence.

The focus of attention should be on whether the SG’s forecasts are reasonable, not on any differences in the SG’s official forecasts and the commission’s benchmark alternative forecasts. If the commission’s independent forecasts are substantially different from those of the government, the commission would provide reasons why the government’s forecasts are not reasonable. The SFC bill could require this.

To help strengthen existing provisions to ensure the operational independence of the commission, he suggests the bill be amended to help ensure that it acts independently, not only of the Scottish Government, but also of the parliament and any other public or private entity.

On the selection of commission members, I have previously argued here that, rather than the administration putting forward its own slate of nominations to the parliament for approval, nominations should be made by an independent “troika”. I was thus pleased to see that his report recommends the formation of a special panel (that could include the SFC chair) for selecting a short-list of candidates for commission members for approval by the parliament. Finally, Lienert suggests an astringent line on costs – the Scottish Government currently estimates an annual budget for the commission from 2017-18 of £850,000 a year. While keen to see costs kept to a minimum, I would be concerned that the commission did not have a budget for contingencies, enabling it to pull in extra resources when guidance is needed on unexpected and unforeseen events. Closing date for submissions from the public is this coming Friday, 6 November and should be sent electronically in Word doc format to finance.committee@scottish.parliament.uk. «

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